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Category Archives: Outsourcing

By now, you are well aware that you are understaffed and that you need to do something about it. You’re also aware that you may need to, or want to, outsource your category, project, or staff augmentation requirements. And, after our last post, you know that you better make sure that the category or project passes the sniff test before you ship it out.

That’s a good start, but if the outsourcing is going to work, it probably has to be vested. So before you check off outsourcing as a valid option for consideration, make sure it meets the requirements for a vested outsourcing arrangement.

Outcome Focussed
A vested outsourcing arrangement is outcome-based, not transaction based. If the project is not focussed on an outcome, such as cost reduction, value add creation, etc., and is merely focussed on transactional invoice processing, it’s not a good candidate.

What Focussed
A vested outsourcing arrangement can define the outcome irrespective of the how.

Measurable
The outcome can not only be clearly defined, but can be objectively measured against a well-defined scale.

Incentive-Friendly
The measurable objective can be used as a foundation for performance incentives to incentivize the provider to perform better.

Joint-Governance Friendly
The category or project lends itself to insight based governance, where you work with the supplier to overcome challenges and obtain better performance.

If you check all of these boxes, then outsourcing is a very viable alternative. But is it your best one? At this point it all comes down to what your insourcing option is.

So how do you make your final decision? We’ll address that in our conclusion to this series.

Now that we’re in Part III, the doctor is going to tell you that even if you’re in the 2/3rds of Procurement Organizations that do not think you’re understaffed, you are. Even if you have enough headcount, chances are you do not have enough skills to tackle each category and project to the maximum potential as each staff member in your department is only human, and can only master a limited number of categories in a job where you are expected to be a jack-of-all-trades. The only question is are you slightly understaffed or significantly understaffed.

If you’re significantly understaffed, you’re going to have to augment externally as there’s no way you will be able to handle a large influx of internal staff, even if they are temporary and category/service experts, as they still have to be trained on your organizational procedures and policies, guided towards optimal outcomes for your organization, and managed.

If you’re moderately understaffed, it’s often a toss-up that comes down to your particular needs and the strength of the options provided to you.

If you’re slightly understaffed, you might just need one or two more resources internally to reach your potential, but you still might want to consider outsourcing if the appropriate talent is not available to you or it’s easier to get budget approval if you outsource a project to a services provider.

So, if you think outsourcing is a reasonable option, how do you make the decision?

First of all, you make sure that outsourcing is a viable option. The best way to start is to apply a sniff test and make sure that the proposed projects don’t suffer from the 10 ailments of outsourcing, as presented in a presentation by Andrew Downard (of AD Supply Chain Group) and Karl Manrodt (of Georgia Southern University) on Delivering Better Service, Lower Costs and Increasing Innovation Through Vested Outsourcing, and make sure there are no hidden gotchas waiting to jump out and bite you in the backside.

As per the presenters, and a co-author of Vested Outsourcing, you need to make sure that the proposed project is not:

Penny-Wise and Pound-Foolish

and being considered for outsourcing just because outsourcing is expected to be cheaper

An Outsourcing Paradox waiting to happen

because you expect that the provider will do what you tell them to which you incorrectly assume is the best thing to do

An Activity Trap
where the provider is getting paid by the hour or transaction

The Next Junkyard Dog
where you will assign the project to internal experts who will micro-manage the contract

The Result of The Honeymoon Effect
where the provider is getting the work because they just went overboard on the last project

Sandbagging
where the provider is penalized if they don’t deliver a contracted level of effort, but not incentivized for a better than average performance, so the provider will deliver minimalist results

a Zero-Sum Game
where you don’t accept the provider’s preferred terms of engagement, assuming that what’s good for them is bad for you

Driving Blind
as you don’t have any formal governance processes setup to monitor the performance of the relationship

the next instance of Measurement Minutiae
where you over-measure and under-incentivize the provider

Measurement-Free
although you shouldn’t over-measure, you should measure the results of each project

If it passes the sniff-test, then you can seriously consider the categories and projects for outsourcing, provided you have an appropriate provider with talented personnel. But is that enough to make a decision? We’ll address that in Part IV.

In our last post, we noted that the findings of a recent Source One Management Services survey (summarized in Part I of a 4-part series on how Companies Face Limited Procurement Resources that is available on their website) indicate that 1 of 3 procurement departments is understaffed. Ouch!

We further noted that this had three definite repercussions.

You’re not doing enough analysis.

You’re not sourcing enough categories.

You’re not finding new sources of value.

So what can you do?

At a high level, you can either do something or you can do nothing. Assuming you choose to do something, you can do it internally, or you can do it externally. If you do it internally, you can add staff or augment staff. If you do it externally, you can augment staff or outsource. If you can outsource, you can outsource projects or outsource categories / commodities to a GPO. In other words, your options are:

Do nothing.

Hire more staff.

Augment headcount with temporary staff.

Augment headcount with service/solution provider personnel.

Outsource project(s).

Outsource categories/commodities to a GPO.

Even though you might think your superiors want you to do nothing, as they give you nothing to work with, that’s not the answer. You’ll just get more budget and staff cuts. And even if you can get approval to hire more staff, that might not be the answer in the short term. It takes time to ramp a new hire up to speed, and what is given may be taken away even quicker if you don’t get results.

This says that, in the short term, your best option is typically to:

Augment headcount with temporary staff.

Augment headcount with service/solution provider personnel.

Outsource project(s).

Outsource categories/commodities to a GPO.

But the right answer is not always clear. For example, while you might be able to save an average of 10% off of your office suppliers by switching to a GPO, if you are including high cost / high volume items like printers, external storage tapes and drives, and office chairs in your office supplies, you might do better sourcing those separately. If this means that the remaining spend is not enough for the GPO, that might still be okay if you can save enough on the big spending items and just negotiate an x% off catalog pricing on the rest.

And when do you augment staff on your own versus flipping a project to a service provider’s staff? If it’s just muscle you need to get your spending in order and to run one-off analyses to find new options and to make sure spend is put through the system (to get maverick spend under control), then your best option might be to augment internally. But if you need someone to source medium- or high-dollar complex / strategic categories, you probably need some category expertise. Chances are that expertise will be hard to find, expensive, and only needed once every couple of years. Unless the candidate comes with some other useful skills, then you might want to temporarily augment your staff with expert service provider staff.

First things first. The findings of a recent Source One Management Services survey (summarized in Part I of a 4-part series on how Companies Face Limited Procurement Resources, available on their website) indicate that 1 of 3 Procurement departments is understaffed. Ouch! With costs climbing and GDP growth (and, thus, consumer spending) flattening, this is not a good thing. For many companies, their only option for growth is cost control and value generation through Supply Management. (Note that we are claiming cost control and not cost savings because, now that inflation is back with a vengeance, with hyper-inflation lurking around the corner, there is no such thing as cost savings, just cost control.)

So what does this mean?

You’re not doing enough analysis.
Analysis takes time. More time than just dumping your AP and P-Card databases into a spend analysis tool and running the canned top-n spend reports by supplier, category, department, etc. As per our recent post on Spend Analysis – How Do You Get It Right, real savings comes from real insight which requires real analysis, which takes time, effort, and focus.

You’re not sourcing enough categories. If you’re short-staffed, you’re going to focus on the top n suppliers, categories, departments, etc. spit out by the canned reports from your spend analysis reporting tool. Some of these will have opportunities, but since you’ll already know most of these opportunities, you’ll miss many of your biggest opportunities, which are typically found in the high-opportunity tier-2 categories that never get addressed due to lack of resources.

You’re not finding new sources of value.
The future of Supply Management, in an inflationary economy, is value-generation. Cost control is a good start, and in an organization overspending by 5% to 15%, it will make a big impact in the beginning. But once all of the fat is trimmed, the best you can do is reign in costs. This means that the next round of savings is going to come from identifying value-generation opportunities. Bundling and unbundling the right value added services for your organization; helping engineering identify more cost-effective alternate materials and production processes that are also more environmentally friendly, and may let you charge a sustainability premium; and identifying new market opportunities based on products and services your strategic suppliers could provide you with can all bring value to your organization.

As per a number of Sourcing Innovation posts, and a recent post over on Procurement Leaders on Procurement Fraud: A Shocking Wake-Up Call, procurement is a ripe area for occupational fraud. Outside of Accounts Payable, Procurement generally controls or influences the most organizational spend.

And not only is Procurement Related Fraud on the Rise, but it is taking place at 2 out of every 3 organizations — many of which are even unaware of its presence! Furthermore, every organization affected by fraud is likely losing 2% of its revenues to fraud. Forget overpayments, duplicate payments, and other recovery audit targets that, even when extremely successful, aren’t likely to recover more than 0.5% of your revenue in supplier credits — especially when most of these overpayments can be prevented with good invoice automation. Fraud is the bigger uncontrolled drain on the average organization’s coffers, and the issue that most needs to be attacked.

Fortunately, there are tell-tale signs of fraud, and if you regularly look for, investigate, and take precautions to prevent certain scenarios, the chances of fraud occurring in your organization will be significantly reduced. A number of these signs are succinctly summarized in Mr. Ashcroft’s post on Procurement Fraud: A Shocking Wake-Up Call, referenced above, but it’s the first four that really catch your attention.

Single Source Decisions

Insistence on Sole Contact With Suppliers

Reluctance to Change Suppliers

Refusal to Issue Invitations to Tender

All of these relate to sole-sourcing, which we all know to be a significant supply chain risk as a single disruption can wipe out an entire product line or category. Sole-sourcing should generally only be used when you are producing a new product which involves turning over a lot of proprietary knowledge to the manufacturer, proprietary knowledge upon which your competitiveness is dependent, or when the product requires a new type of technique that only one supplier can currently offer at an affordable price point. Otherwise, for supply assurance and risk mitigation, dual (or tri) supply should be used.

If something is being sole-sourced for which there is no good justification, then the sole-source arrangement should be carefully evaluated as the reason therefore could be fraudulent (or, if not fraudulent, unethical, as the buyer could be choosing that supplier simply because the supplier constantly gives the buyer free tickets to sporting events, free trips to industry conferences, etc.). And if any suggestions to change the supplier meet with unnecessary reluctance or insistence not too, that’s an even bigger indicator that something could be happening under the table.

In other words, when you get right down to it, sole-sourcing is generally not a good decision. When you combine the opportunities it presents for fraud and disruption, the risk is typically too great.